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OPEN JOINT STOCK COMPANY AMRAHBANK JOINT STOCK BANK 

 

NOTES TO THE FINANCIAL STATEMENTS (Continued) 

FOR THE YEAR ENDED 31 DECEMBER 2008 

(in Azerbaijan Manats) 

18 

 

 

Allowance for impairment of loans  

The Bank regularly reviews its loans and receivables to assess for impairment. The Bank’s loan 

impairment provisions are established to recognize incurred impairment losses in its portfolio 

of loans and receivables. The Bank considers accounting estimates related to allowance 

for impairment of loans and receivables a key source of estimation uncertainty because (i) they are 

highly susceptible to change from period to period as the assumptions about future default rates and 

valuation of potential losses relating to impaired loans and receivables are based on recent 

performance experience, and (ii) any significant difference between the Bank’s estimated losses and 

actual losses would require the Bank to record provisions which could have a material impact on its 

financial statements in future periods. 

 

The Bank uses management’s judgment to estimate the amount of any impairment loss in cases 

where a borrower has financial difficulties and there are few available sources of historical data 

relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on 

past performance, past customer behavior, observable data indicating an adverse change in the 

payment status of borrowers in a group, and national or local economic conditions that correlate 

with defaults on assets in the group. Management uses estimates based on historical loss experience 

for assets with credit risk characteristics and objective evidence of impairment similar to those in the 

group of loans and receivables. The Bank uses management’s judgment to adjust observable data for 

a group of loans or receivables to reflect current circumstances not reflected in historical data. 

 

The allowances for impairment of financial assets in the financial statements have been determined 

on the basis of existing economic and political conditions. The Bank is not in a position to predict 

what changes in conditions will take place in the Republic of Azerbaijan and what effect such 

changes might have on the adequacy of the allowances for impairment of financial assets in future 

periods. 

 

The carrying amount of the allowance for impairment of loans to customers is AZN 1,128,358 and 

AZN 6,612,226 as at 31 December 2008 and 2007, respectively. 

 

Valuation of Financial Instruments 

Financial instruments that are classified as available for sale are stated at fair value. The fair value 

of such financial instruments is the estimated amount at which the instrument could be exchanged in 

a current transaction between willing parties, other than in a forced or liquidation sale. If a quoted 

market price is available for an instrument, the fair value is calculated based on the market price. 

When valuation parameters are not observable in the market or cannot be derived from observable 

market prices, the fair value is derived through analysis of other observable market data appropriate 

for each product and pricing models which use a mathematical methodology based on accepted 

financial theories. Pricing models take into account the contract terms of the securities as well as 

market-based valuation parameters, such as interest rates, volatility, exchange rates and the credit 

rating of the counterparty. Where market-based valuation parameters are not directly observable, 

management will make a judgment as to its best estimate of that parameter in order to determine a 

reasonable reflection of how the market would be expected to price the instrument. In exercising this 

judgment, a variety of tools are used including proxy observable data, historical data, and 

extrapolation techniques. The best evidence of fair value of a financial instrument at initial 

recognition is the transaction price unless the instrument is evidenced by comparison with data from 

observable markets. Any difference between the transaction price and the value based on a valuation 

technique is not recognized in the income statement on initial recognition. Subsequent gains or 

losses are only recognized to the extent that it arises from a change in a factor that market 

participants would consider in setting a price. 

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OPEN JOINT STOCK COMPANY AMRAHBANK JOINT STOCK BANK 

 

NOTES TO THE FINANCIAL STATEMENTS (Continued) 

FOR THE YEAR ENDED 31 DECEMBER 2008 

(in Azerbaijan Manats) 

19 

 

 

The Bank considers that the accounting estimate related to valuation of financial instruments where 

quoted markets prices are not available is a key source of estimation uncertainty because:  (i) it is 

highly susceptible to change from period to period because it requires management to make 

assumptions about interest rates, volatility, exchange rates, the credit rating of the counterparty, 

valuation adjustments and specific feature of the transactions and (ii) the impact that recognizing a 

change in the valuations would have on the assets reported on its balance sheet as well as its 

profit/(loss) could be material. 

 

Had management used different assumptions regarding the interest rates, volatility, exchange rates, 

the credit rating of the counterparty and valuation adjustments, a larger or smaller change in the 

valuation of financial instruments where quoted market prices are not available would have resulted 

that could have had a material impact on the Bank’s reported net income. 

 

The carrying amount of the financial instruments at fair value is as follows as at 31 December 2008 

and 2007: 

 

 

31 December  

2008 

 

31 December  

2007 

 

Investments available-for-sale 

 

5,762,993 

 

 

200,000 

 

 

Adoption of new and revised international financial reporting standards 

 

In the current year, the Bank has adopted all of the new and revised Standards and Interpretations 

issued by the International Accounting Standards Board (the “IASB”) and the International Financial 

Reporting Interpretations Committee (the “IFRIC”) of the IASB that are relevant to its operations 

and effective for annual reporting periods ending on 31 December 2008. The adoption of these new 

and revised Standards and Interpretations has not resulted in significant changes to the Bank’s 

accounting policies that have affected the amounts reported for the current or prior years. 

 

Amendments to IAS 1 “Capital Disclosures” (“IAS 1”) – On 18 August 2005, the IASB issued an 

amendments to IAS 1 which requires certain disclosures to be made regarding the entity’s objectives, 

policies and processes for managing capital. Additional information was disclosed in the financial 

statements for the current and comparative  reporting periods as required by amended IAS 1. 

 

Amendments to IAS 39, “Financial Instruments: Recognition and Measurement”, and IFRS 7, 

“Financial Instruments: Disclosures”, titled “Reclassification of Financial Assets” – On 13 October 

2008 IASB issued amendments to IAS 39 and IFRS 7 which permits certain reclassifications of non-

derivative financial assets (other than those designated as at fair value through profit or loss at initial 

recognition under the fair value option) out of the fair value through profit or loss category and also 

allow reclassification of financial assets from the available for sale category to the loans and  

receivables category in particular circumstances. The amendments to IFRS 7 introduce additional 

disclosure requirements if an entity has reclassified financial assets in accordance with the 

amendments to IAS 39. The amendments are effective as of 13 October 2008 and in certain 

circumstances can be applied retrospectively from 1 July 2008. The Bank has elected not to apply 

the amendments to IAS 39 and IFRS 7 retrospectively. 

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